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NO. 308

TRADE POLICY OPTIONS FOR ASEAN COUNTRIES AND THEIR REGIONAL

DIALOGUE PARTNERS “PREFERENCE ORDERING” USING CGE ANALYSIS

XIANBAI JI, PRADUMNA B. RANA, WAI-MUN CHIA, AND CHANG TAI LI

S. RAJARATNAM SCHOOL OF INTERNATIONAL STUDIES SINGAPORE

19 MARCH 2018

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About the S. Rajaratnam School of International Studies

The S. Rajaratnam School of International Studies (RSIS) was officially inaugurated on 1 January 2007. Prior to this, it was known as the Institute of Defence and Strategic Studies (IDSS), which was established 10 years earlier, on 30 July 1996, by Dr Tony Tan Keng Yam, then Deputy Prime Minister and Minister for Defence. Dr Tony Tan later became the elected seventh President of the Republic of Singapore. Like its predecessor, RSIS was established as an autonomous entity within Nanyang Technological University (NTU). RSIS’ mission is to be a leading research and graduate teaching institution in strategic and international affairs in the Asia Pacific. To accomplish this mission, it will:

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Research Research takes place within RSIS’ five components: the Institute of Defence and Strategic Studies (IDSS, 1996), the International Centre for Political Violence and Terrorism Research (ICPVTR, 2004), the Centre of Excellence for National Security (CENS, 2006), the Centre for Non-Traditional Security Studies (NTS Centre, 2008); and the Centre for Multilateralism Studies (CMS, 2011). Research is also conducted in the Studies in Inter-Religious Relations in Plural Societies (SRP, 2014) Programme, the National Security Studies Programme (NSSP, 2016), and the Science and Technology Studies Programme (STSP, 2017). Additionally, within the Office of the Executive Deputy Chairman, the Policy Studies group identifies new emerging trends of concern in the broad national security domain that may then be gradually incubated to form new policy-relevant RSIS research programmes. The focus of research in RSIS is on issues relating to the security and stability of the Asia Pacific region and their implications for Singapore and other countries in the region. The School has four endowed professorships that bring distinguished scholars and practitioners to teach and to conduct research at the school. They are the S. Rajaratnam Professorship in Strategic Studies; the Ngee Ann Kongsi Professorship in International Relations; the NTUC Professorship in International Economic Relations; and the Peter Lim Professorship in Peace Studies.

International Collaboration Collaboration with other professional schools of international affairs to form a global network of excellence is a RSIS priority. RSIS maintains links with other like-minded schools so as to enrich its research and teaching activities as well as learn from the best practices of successful schools.

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Abstract

The withdrawal of the United States (US) from the Trans-Pacific Partnership (TPP) and

Trump’s “America First” agenda have ignited a second round of interest in mega-free trade

agreements (mega-FTAs) in the Asia Pacific region. Countries have been motivated to

explore alternative trade policy options. Using national real gross domestic output (GDP)

gains estimated by the GTAP model to construct “preference ordering” for ten Association of

Southeast Asian Nations (ASEAN) and their six regional dialogue partners, this paper comes

up with several findings. First, when multilateral agreements are not possible, countries are

better off with a narrower regional trading agreement than without one. Second, in the region,

RCEP has higher beneficial impacts than the CPTPP. Third, for dual track countries, that is

countries that are negotiating both the CPTPP and the RCEP, implementing both agreements

is better than each separately. Fourth, as expected, economic impacts of the CPPTP are

lower than those of the original TPP12, but all CPPTP members will benefit although to

different degrees. Fifth, economic impacts of open regionalism are higher than those of a

closed and reciprocal one. Going forward, the paper argues that ASEAN countries and their

regional dialogue partners need to adopt a “multi-track, multi-stage” approach to trade policy.

JEL CLASSIFICATION: F13, C68, F50

*********************

Xianbai Ji is a PhD Candidate at the S. Rajaratnam School of International Studies (RSIS),

Nanyang Technological University, Singapore. He holds the prestigious Nanyang President’s

Graduate Scholarship to conduct doctoral research. His main interests include international

trade in Asia Pacific, European economy and regional integration, global economic

governance and international development. His articles feature regularly in the region’s

newspapers and magazines such as Asia Europe Journal, The National Interest, The

Diplomat, East Asia Forum, Global Times, The Business Times, BRINK Asia, Bangkok Post,

Global Trade and Sina World Weekly. He is a current affair commentator for MediaCorp and

held a Visiting Fellowship at the European Union Centre in Singapore in 2016 and the Europa

Visiting Fellowship at The Australian National University in 2017.

Dr Pradumna B. Rana is an Associate Professor of Economics at the Centre for

Multilateralisn Studies of the S. Rajaratnam School of International Studies, Nanyang

Technological University, Singapore. He is an international economist with expertise in the

areas of international macroeconomics, trade, and development issues focusing on Asia. He

was the Senior Director of the Asian Development Bank’s Office of Regional Economic

Integration which spearheaded the ADB’s support for Asian economic integration. Prior to

that, he held various senior positions at the ADB for many years. He has teaching and

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research experience at the NTU, NUS, and the Tribhuvan University, Nepal. He obtained his

PhD from Vanderbilt University where he was a Fulbright Scholar and a Masters in

Economics from Michigan State University and Tribhuvan University where he was a gold

medalist. He has published widely in the areas of Asian economic development and

integration, financial crises, and economic policy reforms in transition economies. These

include 16 authored or edited books, over 25 chapters in books, and over 40 articles in

international scholarly journals. His recently co-authored books are Jumpstarting South Asia:

Revisiting Economic Reforms and Look East Policies (New Delhi, OUP), South Asia: Rising to

the Challenge of Globalisation (World Scientific Press), and Asia and the Global Economic

Crisis: Challenges in a Financially Integrated World (Palgrave Macmillan). His recently co-

edited books are Pan-Asian Integration: Linking East and South Asia and National Strategies

for Regional Integration: South and East Asian Case Studies.

Dr Chia Wai Mun is an Associate Professor of Economics at the Division of Economics,

Nanyang Technological University. She obtained her Bachelor’s degree in Economics from

the University of London with First Class Honors in 1996. She was then awarded the Datuk

Paduka Hajjah Saleha Ali Academic Outstanding Award for her exceptional academic

performance at international level in 1997. In 1998, with the support of the London School of

Economics (LSE) Scholarship, she pursued her Master’s degree at LSE. In 2006, she

graduated with a PhD degree from NTU. Prior to joining NTU, she was an industry analyst at

the Federation of Malaysian Manufacturers. Her current research interests are international

macroeconomics, economic integration in East Asia and cost-benefit analysis. She is an

Associate Editor to the Singapore Economic Review and Treasurer of the Economic Society

of Singapore. She is also a research consultant to the ASEAN Secretariat. She has published

widely in internationally reputable journals such as Applied Economics, World Economy,

Journal of Asian Economics, Economic Record and Journal of Economic Dynamics and

Control. She also consulted various government agencies in Singapore including National

Environment Agency (NEA), Land Transport Authority (LTA), Building and Construction

Authority (BCA), Singapore Police Force (SPF) and Ministry of Community, Youth and Sports

(MCYS). In recognition of her contributions in research and teaching, she was awarded the

National Day Commendation Award in 2011.

Changtai Li is a PhD candidate in Division of Economics of Nanyang Technological

University (NTU). Prior to enrolling at NTU, he worked for one year as Research Associate in

Division of Economics and the S. Rajaratnam School of International Studies (RSIS) at the

same university. He holds a masters degree in Applied Economics from NTU and a Bachelor

of Art from China University of Petroleum. He is interested in fields like international trade,

econometrics and financial economics.

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I. Introduction1

There have been two rounds of interest in mega-free trade agreements (mega-FTAs). A

decade ago, policymakers in Asia Pacific countries started to see mega-FTAs as a third trade

liberalisation option in between a deadlocked multilateral agreement under the auspices of

the World Trade Organization (WTO) and bilaterals whose benefits are dubious in the shadow

of criss-crossing rules of origin (ROOs) that create a tangled “noodle bowl”.2 Hence,

negotiations for the Trans-Pacific Partnership (TPP12) that involved 12 Pacific Rim

economies commenced in March 2010 and those for the Regional Comprehensive Economic

Partnership (RCEP) were initiated in May 2013 (Table 1). The latter brings together ten

members of the Association of Southeast Asian Nations (ASEAN) and their six regional

dialogue partners. A year later, in November 2014, 21 Asia-Pacific Economic Cooperation

(APEC) members pledged to explore the prospect for realising a Free Trade Area of the Asia-

Pacific (FTAAP) as an important policy instrument to advance its regional economic

integration agenda. While the TPP agreement was concluded and signed with much fanfare

in October 2015 and February 2016, respectively, the first wave of mega-FTA movement was

essentially ground to a halt by a host of adverse factors including the rise of protectionism and

anti-globalisation sentiment, regulatory and transparency concerns, a contentious US election

that scapegoated foreign trade for political incompetence, and the institutional deficiency of

APEC as a negotiating platform.

However, after President Donald Trump pulled the US out of the TPP grouping in

January 2017 and reiterated an “America First” trade policy at the 2017 APEC meetings in

favour of bilateralism and “fair trade”, a second round of interest in mega-FTAs is taking hold

with regional countries proactively exploring alternative economic cooperation possibilities.

Early signs show that Asia Pacific countries are reluctant to engage in one-on-one trade

negotiations with the US, as bilateral FTAs in theory are only “second best”, if not “third best”,

1 The research was supported by the Academic Research Fund (AcRF) Tier 1 Grant awarded by the

Ministry of Education, Singapore (RG174/14). The authors thank Paul Gretton of The Australian National University for providing the modified longer-run GTAP closure used in this paper.

2 Kawai, Masahiro, and Ganeshan Wignaraja. 2009. The Asian “Noodle Bowl”: Is It Serious for Business? . In ADBI Working Paper Series. Tokyo: Asian Development Bank Institute.

2

policy recourse, and could engender asymmetrical trade concessions disproportionately

benefiting the US. Hence, they appear to have decided to carry through the unfinished

business of negotiating mega-FTAs, to not only sustain economic growth but also signal an

unwavering commitment to combating economic nationalism. In the margins of the APEC

gatherings in November 2017, 11 remaining TPP countries revived the stalled TPP and

renamed it as “Comprehensive and Progressive Agreement for Trans-Pacific Partnership”

(CPTPP), after suspending temporarily a narrow set of 20 provisions in relation to intellectual

property rights, trade facilitation, investment and others.3 Progress, albeit slow, is also being

made on the RCEP front in parallel. Prime Minister Lee Hsien Loong promised that Singapore

will put in “maximum efforts” to push RCEP negotiations forward4 under the country’s 2018

ASEAN chairmanship. In a similar move, South Korea announced its willingness to voluntarily

serve as an active coordinator to secure a rapid conclusion of RCEP talks.5 At the same time,

several major regional economies such as China, Russia and South Korea are lining up to

back the so-called “Beijing Roadmap” which calls for a timely establishment of the FTAAP to

fulfil the long-cherished dream of “a dynamic and harmonious Asia Pacific community”.

Despite the reignited interest in mega-FTAs, looking ahead a couple of pertinent

policy questions remain. With the US withdrawal, does it still make economic sense for the

remaining members to move forward with the watered-down CPTPP? Should they simply

pivot to RCEP instead? Or should they seek dual membership to participate in both the

CPTPP and RCEP? Is the case strong for RCEP and CPTPP tracks to converge over time to

forge a region-wide system akin to FTAAP? How about taking steps to implement the CPTPP,

RCEP and FTAAP in an open, non-discriminatory manner? How do gains from regional trade

accords compare to those that accrue from multilateral trade liberalisation? This paper

provides answers to those important questions by undertaking computable general

3 Rana, Pradumna B., and Xianbai Ji. 2017. "TPP's resurrection: Will it be ratified at all?" The Business

Times. http://www.businesstimes.com.sg/opinion/tpps-resurrection-will-it-be-ratified-at-all. 4 Yong, Charissa. 2017. "Leaders call for greater effort to conclude RCEP talks." The Straits Times.

http://www.straitstimes.com/asia/leaders-call-for-greater-effort-to-conclude-rcep-talks. 5 Jung, Suk-yee. 2017. "Preferring RCEP To TPP? S. Korean Government Putting RCEP before TPP."

Business Korea. http://www.businesskorea.co.kr/english/news/national/19813-preferring-rcep-tpp-s-korean-government-putting-rcep-tpp.

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equilibrium (CGE)-based analysis of various trade policy options facing the 16 selected Asia

Pacific countries – 7 CPTPP-TPP dual track countries (Australia, Brunei, Japan, Malaysia,

New Zealand, Singapore and Vietnam) and 9 single RCEP track countries (Cambodia, China,

India, Indonesia, Laos, Myanmar, the Philippines, South Korea and Thailand). Real gross

domestic product (GDP) gains expected under alternative policy scenarios are ranked from

the highest to lowest to construct what game theorists refer to as “preference ordering”.6

While there is a large volume of economic literature focusing on the likely economic

consequence of individual mega-FTAs such as the TPP12,7 RCEP8 and FTAAP9, policy

oriented studies which explicitly and comprehensively contrasts the economic impacts of

alternative regional trade policy options are relatively few in number. Petri et al10. and

Schott11, who employ quantitative and qualitative methods, respectively, to investigate the

trade policy spectrum (ranging from the TPP11 to bilateral FTA with the US) available to Asia

Pacific countries in the immediate future, are the notable exceptions. This paper also attempts

to fill the gap. The paper differs from the work of others in the sense that, in addition to

analysing the FTA portfolio that is available to countries in the immediate future, it adopts a

longitudinal perspective to propose a “multi-track, multi-step” trade policy roadmap with

milestones to be achieved across the time horizon (i.e. short-term, medium-term, and long-

term). Concurring with Petri et al. and Schott who argue that “bigger is better”, this paper also

demonstrates that “the more the merrier” and “opener is better”, meaning that, for Asia Pacific

6 Brams, Steven. 1994. Theory of moves. Cambridge: Cambridge University Press. 7 Petri, Peter A., and Michael G. Plummer. 2016. The Economic Effects of the Trans-Pacific Partnership:

New Estimates. In PIIE Working Paper Series. Washington, DC: Peterson Institute for International Economics; Petri, Peter A., Michael G. Plummer, and Fan Zhai. 2011. The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment. In East-West Center Working Papers. Honolulu: East-West Center; USITC. 2016. Trans-Pacific Partnership Agreement: Likely

Impact on the U.S. Economy and on Specific Industry Sectors. Washington, DC: United States International Trade Commission; and World Bank. 2016. "Potential Macroeconomic Implications of the Trans-Pacific Partnership." In Global Economic Prospects. Washington, DC: The World Bank.

8 Cheong, Inkyo, and Jose Tongzon. 2013. "Comparing the Economic Impact of the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership." Asian Economic Papers 12 (2):144-164. doi: 10.1162/ASEP_a_00218.

9 Scollay, Robert, and John Gilbert. 2000. "Measuring the Gains from APEC Trade Liberalisation: An Overview of CGE Assessments." The World Economy 23 (2):175–197.

10 Petri, Peter A., Michael G. Plummer, Shujiro Urata, and Fan Zhai. 2017. Going It Alone in the Asia-Pacific: Regional Trade Agreements WIthout the United States. In PIIE Working Paper. Washington, DC: Peterson Institute for International Economics.

11 Schott, Jeffrey J. 2017. US Trade Policy Options in the Pacific Basin: Bigger Is Better. In Policy Brief.

Washington, DC: Peterson Institute for International Economics.

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Note: the numbers in the parenthesis are the per cent of world total.

Source: World Bank Database; United Nations Database; author’s calculation and compilation from various sources.

TABLE 1. COMPARING THE MEGA-REGIONAL INITIATIVES

TPP CPTPP (TPP11) RCEP FTAAP FTAAP+

Membership

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, US and Vietnam

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam

Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, Australia, China, India, Japan, South Korea and New Zealand

Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Chinese Taipei, Thailand, US and Vietnam

Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Chinese Taipei, Thailand, US, Vietnam, India, Cambodia, Myanmar, Laos

GDP in 2016 (nominal, $ trillion)

28.7 (38.0%)

10.2 (13.4%)

23.8 (31.4%)

45.1 (59.7%)

47.5 (62.9%)

Population (as of 1 July 2017, billion)

0.7 (9.3%)

0.4 (5.0%)

3.6 (47.7%)

2.8 (36.9%)

4.2 (55.6%)

Negotiation started/concluded

15–19 March 2010/5 October 2015

- 9–13 May 2013/On-going - -

Negotiation objectives/visions

A landmark 21st century agreement, setting a new standard for global trade while taking up next-generation issues.

Promote regional economic integration and contribute to the economic growth prospects of its member countries, and create new opportunities for workers, families, farmers, businesses and consumers.

Launching RCEP negotiations is to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement among the ASEAN Member States and ASEAN’s FTA Partners.

Be pursued on the basis of supporting the multilateral trading system.

Do more than achieve liberalisation.

Work towards the Bogor Goals.

Be realised outside of APEC, in parallel with the APEC process.

Aim to minimise any negative effects.

-

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countries, concurrent participation in multiple mega-FTAs and operationalising the “open

regionalism” principle12 to extend preferential tariff reductions to non-member economies

would better serve national interests than pursuing a single-track, narrower and reciprocal

trade pact.

The paper is organised as follows. The next section briefly describes the CGE model

used in this paper, i.e. the Global Trade and Analysis Project (GTAP) comparative static

model, and the modifications made to the default closure to permit a more accurate estimate

of the macroeconomic effects after market forces work through the economies in the longer

run. Section III presents the simulation scenarios examined, including the CPTPP, RCEP, the

parallel existence of the CPTPP and RCEP, FTAAP+ (a hypothetical region-wide umbrella

FTA resembling a merger between the CPTPP and RCEP), open regionalism scenarios, and

multilateral tariff eliminations analogous to a successful conclusion of the Doha Development

Agenda (DDA). See Table 1 for a comparison of the TPP, CPTPP, RCEP, FTAAP and

FTAAP+. In Section IV, we summarise the estimation results by constructing “preference

orderings”. Several findings and policy implications are discussed. The last section concludes

the paper.

II. GTAP AND KEY MODELLING ASSUMPTIONS

GTAP is an advanced multi-region, multi-sector general equilibrium model extensively used to

conduct quantitative trade policy analysis.13 Core to the GTAP model is a database that

comprehensively reports on the state of the world economy including (virtually) all trade flows

and inter-industrial links between and within national/regional economies for a given reference

year, and a set of elasticity-based behavioural equations and parameters predicting how

market agents (e.g. private households, firms and governments) would react to changes in

the system when a policy “shock” is introduced. Thus, the GTAP model can help answer

12 Bergsten, Fred. 1997. "Open Regionalism." The World Economy 20 (5):545–565. 13 Hertel, Thomas W. 1997. Global Trade Analysis: Modeling and Applications. Cambridge: Cambridge

University Press.

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“what-if” policy questions by offering a counter-factual analysis based on a before- and after-

shock comparison of an economy. As a comparative-static model that focuses on inter-

equilibrium differentials, the standard GTAP model used in this study does not attempt to

trace out intra-equilibrium dynamics, such as the adjustment process, that the economy would

undergo before it arrives at new prices and quantities that clear all markets.

The model adopts a default short-term closure under which cross-border mobility of

capital is prohibited. To account for the longer-run effects of the trade arrangements under

study, our modified closure – first developed by the Australia Productivity Commission14 –

creates a longer-term macro-environment in which capital is allowed to move between

economies in search of highest return while the global stock of capital remains fixed.15

A. Regional and Sectoral Aggregations

In a GTAP model, to focus on key results and enhance computational efficiency, regions and

sectors are bundled into aggregates. In our analysis, twenty-two regions which take part in at

least one mega-accord are identified and individually retained with the rest coming under one

single residual group, the rest of the world (see Appendix 1). The regions selected for an

explicit analysis include: Australia, Brunei, Canada, Cambodia, Chile, China, India, Indonesia,

Japan, South Korea, Lao DPR, Malaysia, Mexico, Myanmar,16 New Zealand, Peru, the

Philippines, Singapore, Thailand and Vietnam. The TPP withdrawer, the US, and the EU

(which are negotiating a third mega-FTA the Transatlantic Trade and Investment Partnership)

are also included in the simulations.

14 Productivity Commission. 2009. Modelling supporting the Productivity Commission Annual Report

2008-09: Technical Note. Melbourne: Productivity Commission. 15 This variant of model closure enables a broader range of capital market responses than would

otherwise be possible, although it does not fundamentally change the short-term nature of the closure as long as the restriction of non-capital-accumulation is not relaxed.

16 In GTAP database, Myanmar is included in a group called ‘Rest of Southeast Asia’ (xse) with Timor-Leste. Since Myanmar’s GDP is close to 60 times as large as the economic size of Timor-Leste as of 2015, ‘xse’ is used to approximately represent Myanmar in this paper.

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The 57 sectors originally classified by the GTAP database are aggregated into 15

main sectors for the purpose of this study.17 Appendix 2 provides an overview of the sectoral

aggregation. The second column shows the chosen aggregates while the last column lists the

GTAP sectors included in the aggregations. Notably more services sectors (communication,

financial services, insurance, construction, transport, trade, business and others) are

represented in the aggregation scheme than manufacturing and food processing industries

are. This is because of the increasing importance of services in national economies and the

different level of liberalisation commitments facing different services industries under mega-

FTAs.

B. Tariff and Non-Tariff Measure Patterns

According to the GTAP database version 9A (with reference year 2011), among the CPTPP

countries, Australia, Brunei, Singapore, Chile, and Peru are the most liberal in terms of tariff

barriers to merchandise trade. In contrast, the rest of CPTPP countries impose comparatively

higher tariffs on flow of goods. Some of them have clustered protection in sectors of economic

and political sensitivity while others show less variation across the gamut of industry sectors.

For example, Canada’s uniformly low tariff structure is accompanied by a few tariff peaks on

New Zealand’s dairy products and Chile’s meat products. Vietnam, on the other hand, tends

to have a tariff pattern that is more consistent across the CPTPP membership. This could be

linked to the fact that Vietnam has relatively few intra-CPTPP trade agreements that liberalise

bilateral trade. It is also worth pointing out that for the CPTPP grouping as whole, some

industries have substantially higher tariffs than others. Most CPTPP countries have higher

tariff levels in meat, livestock and fishery, and processed food industries.

Applied bilateral tariff rates between RCEP members are generally higher than those

between CPTPP partners. A common pattern is that many RCEP countries protect their

17 The purpose of sectoral aggregation is to speed up the computation process. This paper does not

focus on sectoral results for the sake of brevity.

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processed food industry. This is in stark contradiction to extractive industries and heavy

manufacturing industries where average tariffs are close to zero. In addition to inter-sectoral

tariff heterogeneity, some country pairs have distinctly higher bilateral tariff protections than

others, considering Korea’s tariffs on grains imports from India (317 per cent) and Indonesia

(282 per cent), and India’s on processed food imported from Cambodia (85 per cent) and

Malaysia (79 per cent). Conversely, two smallest RCEP members stand out, with Brunei

facing very low tariffs when exporting to other RCEP markets and Singapore presiding over a

zero-tariff tariff regime.

While commercial trading of goods is hindered to a great extent by tariffs, para-tariff

measures and tariff-rate quotas, services trade is more affected by behind-the-border

regulatory and technical measures, collectively known as non-tariff measures (NTMs). It is,

however, a practically and analytically difficult task to collect sector-specific and globally

comparable data on NTMs due partly to their opaque nature.18 Translating NTMs to ad

valorem equivalents (AVEs) – the tariffs rates that would induce the same level of imports as

the NTMs – is by far the most common approach to quantifying NTMs. This paper uses earlier

work on this topic by Fontagné, Guillin, and Mitaritonna19 and USITC.20

It is estimated that, among the CPTPP countries, the sector with the lowest level of

NTMs is transport service with an average protection/regulation of 25 per cent, followed by

other services (34 per cent) and insurance (35 per cent). The highest NTMs are found in

construction (75 per cent), financial services (60 per cent) and business-related trade services

(50 per cent). In particular, NTMs in construction sectors in Peru (159 per cent), Mexico (136

per cent), Chile (133 per cent) and Australia (127 per cent), business service in Mexico (134

18 Dee, Philippa, and Michael Ferrantino. 2005. "Introduction." In Quantitative methods for assessing the

effects of non-tariff measures and trade facilitation, edited by Philippa Dee and Michael Ferrantino. Singapore: APEC Secretariat and World Scientific Publishing.

19 Fontagné, Lionel, Guillin, Amélie, and Mitaritonna, Cristina. 2014. Estimations of Tariff Equivalents for the Services Sectors. Paris: Centre d'Etudes Prospectives et d'Informations Internationales. 20 AVEs for the EU is the GDP-weighted average based on national data for 27 EU member states

excluding Malta, due to a lack of Maltase data. Data for Cambodia, Laos and Myanmar are imputed from Vietnamese data since they form the so-called “CLVM” grouping within ASEAN.

9

per cent) are all greater than 100 per cent. The trend by and large holds with respect to RCEP

countries: the most protected service industries are financial services (67 per cent),

construction (56 per cent) and communication (52 per cent) while transport services (28 per

cent) is the least protected/regulated sector. The average level of NTMs in Singapore is the

lowest in the grouping and India’s service market, in contrast, is the most protected/regulated

with AVEs in communication, construction and financial service sectors amounting to 160 per

cent, 154 per cent, and 137 per cent, respectively.

C. Modelling Assumptions on Market Access

On the basis of the tariff schedules of the negotiated TPP agreement,21 it is assumed that

Australia, Chile, New Zealand, Peru, Singapore, Brunei and Malaysia will lift all tariff barriers

vis-à-vis the remaining CPTPP members and each other. In Mexico, 1 per cent tariff on the

aggregated processed food industry against imports originating in Australia, Brunei, Canada,

Japan, Malaysia, New Zealand, Singapore and Vietnam is retained. To reflect Canada’s

attempt to exempt dairy, poultry and egg markets from full liberalisation and similar attempt by

Vietnam to protect its automotive industry, it is assumed that 3 per cent tariffs still apply in

Canada’s processed food industry and Vietnam’s aggregated heavy manufacturing industry.

Japan comes last in the CPTPP grouping in terms of the scope and depth of tariff removal.

Relatively high tariffs on some meat of bovine animals and selected dairy and textile products

are not negotiated away even after a protracted transition period of 30 years. In this study, the

assumption is that only 90 per cent of tariff protections in Japanese livestock and processed

food industries would be scraped, and so would 95 per cent of tariffs in its textiles and

clothing sector. The extent of services liberalisation attributed to the CPTPP accord is wholly

21 For a brief analysis of the text of the original TPP12, see Freund, Caroline, Tyler Moran, and Sarah

Oliver. 2016. "Tariff Liberalization." In Assessing the Trans-Pacific Partnership. Washington, DC: Peterson Institute for International Economics. Some agreed and pending minor revisions to the original TPP text notwithstanding, the reworked CPTPP will essentially be a replica of the original TPP with tariffs schedules and service liberalisation kept virtually unchanged. See for example ATC. 2017. TPP11: Unpacking the Suspended Provisions. In Policy Brief. Singapore: Asian Trade Centre.

10

obtained from USITC22 which concludes that communication and business services sectors

will be comparatively more exposed to regional competition.

The legal text of RCEP is not available at the time of writing (November 2017). As a

benchmark GTAP shock rate, we assume that RCEP grouping would achieve a tariff removal

rate of 90–95 per cent, a target leaders have publicly declared. Singapore, Australia, Brunei

and New Zealand are considered in this study as full liberalisers which eliminate all tariffs

barriers against RCEP partners, because of their liberal trade policy history and their

concurrent participation in the CPTPP agreement that does not tolerate significant sectoral

carve-outs or residual tariffs post-implementation. A research into tariff elimination coverage

under existing ASEAN+ FTAs by Fukunaga and Isono23suggests that China, Indonesia,

Japan, Korea, Malaysia and the Philippines have shown moderate level of ambitions in

opening up their domestic markets to regional partners. These countries are assumed to

adopt a tariff shock of 95, and the rest of developing RCEP countries 90 per cent. To refine

the assumptions further, tariff peaks presumably corresponding to sectors that would better

withstand the external pressure of liberalisation are identified based on a reading of RCEP

countries’ sector-specific tariffs, both in terms of bilaterally applied and most favoured nation

(MFN) rates. It is found China’s and India’s processed food; Japan’s crops and grains;

Cambodia’s crops and grains, meat and livestock, textiles and manufacturing; Korea’s meat

and livestock and processed food; Laos’ meat and livestock, processed food and light

manufacturing; Malaysia’s grains and crops and heavy manufacturing; Thailand’s processed

food and manufacturing; and Vietnam’s processed food, textiles and manufacturing tend to be

more sensitive sectors, carrying absolutely high or above-regional-average tariffs, for a variety

of politico-economic reasons. Accordingly, tariff shocks applied to these sectors are revised

downward by an additional 5 per cent. Of particular note is that foreign exporters face

extraordinarily high tariff barriers in Korea’s agricultural market, with MFN rates on milling

22 USITC. 2016. Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and on

Specific Industry Sectors. Washington, DC: United States International Trade Commission. 23 Fukunaga, Yoshifumi, and Ikumo Isono. 2013. Taking ASEAN+1 FTAs towards the RCEP: A Mapping

Study. In ERIA Discussion Paper Series Jakarta: Economic Research Institute for ASEAN and

East Asia.

11

industry products and cereals amounting to 330 per cent and 285 per cent, respectively, even

though the country’s overall MFN tariff rate is 14 per cent on average. We therefore assume

that Korea’s grains and crops industry will be subject to a tariff shock of only 85 per cent (see

Appendix 3).

With respect to services liberalisation, we hypothesise that RCEP countries would be

willing to make concessions in sectors that have a prior history of liberalisation and de-

regulation. This assumption is in keeping with the fact that services agreement under RCEP

will follow the “positive approach”, where only specifically listed sectors will be liberalised.

Thus, guesstimate of RCEP’s services “actionability” – how much NTMs can be realistically

removed – is estimated by Ishido24who maps out the degree of liberalisation for several

services industries under concluded ASEAN+ agreements. Appendix 3 presents the assumed

NTMs cuts in RCEP countries; these figures are expressed as percentage reductions to

AVEs. For the RCEP grouping as a whole, our guess is that RCEP-induced services reform

will be limited at best given the relatively closed nature of the services markets in most RCEP

partners and disproportionately heavy presence of state-owned enterprises (SOEs) and

government-linked companies25 which income constitutes an important stream of state

revenue.

D. Trade Facilitation

Apart from swapping preferential market accesses, FTA partners also tend to agree on

provisions that facilitate trade through, among others, simplifying customs procedures,

ditching duplicated safety tests and reducing bureaucratic delays. Hillberry and Zhang 26

estimate that implementation of the WTO’s Trade Facilitation Agreement (which entered into

24 Ishido, Hikari. 2011. Liberalization of Trade in Services under ASEAN+n: A Mapping Exercise. In

ERIA Discussion Paper Series. Jakarta: Economic Research Institute for ASEAN and East Asia. 25 Park, Donghyun. 2013. "Summary of Key Findings and Main Policy Recommendations." In

Developing the Service Sector As an Engine of Growth for Asia, edited by Donghyun Park and Marcus Noland. Manila: Asian Development Bank.

26 Hillberry, Russell Henry, and Xiaohui Zhang. 2015. Policy and performance in customs : evaluating the trade facilitation agreement. In Policy Research working paper. Washington, DC: World Bank.

12

force in February 2017) would result in an average trade cost reduction of 0.9 per cent for

imports and 1.2 per cent for exports. As such, following USITC27, we assume that the TPP

and RCEP would have a small efficiency-enhancing effect (estimated at 1 per cent increase in

efficiency for the former and 0.5 per cent for the latter), removing the “sand in the wheels” of

international trade.28

E. Rules of Origin and Preference Utilisation

To push back against trade deflection and transhipment, reciprocal trade agreements typically

includes a chapter setting out detailed rules of origin (ROOs) procedures for the determination

of the eligibility of products to receive negotiated benefits.29 When complicated ROOs imply

administrative costs and front-loaded investment in compliance expertise, critics claim that the

provision becomes a new class of hidden trade barrier.30 While origin rules are not malicious

by design (and certainly should not be singled out as the reason to reject trade agreement

altogether), they do in practice result in incomplete utilisation of trade preferences written into

FTAs.31 Available empirical investigation suggests that the economic costs of ROOs are not

insignificant, which in the context of goods traded within ASEAN could amount to 25 per

cent.32 Similarly, a 2010 Productivity Commission assessment33 of the preference take-up of

the Australia-US FTA concludes that incomplete utilisation could reduce projected GDP gains

to Australia by approximately 25 per cent, in relation to the case of full take up. As a rule-of-

the-thumb, this study follows Gretton34 in assuming that mega-FTAs’ preferential origin rules

reduce the magnitude of GDP gains by 25 per cent below the case of full take-up. This

27 USITC (n22). 28 Andriamananjara, Soamiely, Michael Ferrantino, and Marinos Tsigas. 2003. Alternative Approaches

in Estimating the Economic Effects of Non-Tariff Measures: Results from Newly Quantified Measures. Washington, DC: United States International Trade Commission.

29 Brenton, Paul. 2011. "Preferential Rules of Origin." In Preferential Trade Agreement Policies for Development : A Handbook, edited by Jean-Christophe Maur and Jean-Pierre Chauffour.

Washington, DC: World Bank. 30 Gretton, Paul, and Jyothi Gali. 2005. "The Restrictiveness of Rules of Origin in Preferential Trade

Agreements " 34th Conference of Economists, Melbourne. 31 Reuters, and KPMG. 2015. "2015 Global Trade Management Survey." accessed 15 July 2016.

https://www.kpmg.com/SG/en/IssuesAndInsights/ArticlesPublications/Documents/Tax-IndTax-2015-Global-Trade-Management-Survey.pdf.

32 Pelkmans-Balaoing, Annette O., and Miriam Manchin. 2007. Rules of origin and the web of East Asian free trade agreements. In World Bank Policy Research Working Paper. Washington, DC:

World Bank. 33 Productivity Commission. 2010. A CGE Analysis of Some Economic Effects of Trade Agreements

Supplement to Bilateral and Regional Trade Agreements. Canberra: Productivity Commission. 34 Gretton, Paul. 2017. Bilateral And Regional Trade Agreements : Detangling The Noodle/Spaghetti

Bowl. In EABER Working Paper. Canberra: East Asian Bureau of Economic Research.

13

discount applies to impacts on non-members because arguably incomplete utilisations also

reduce detrimental effects on them that result from trade diversion and preference erosion.

III. POLICY SIMULATION SCENARIOS

The following policy scenarios are considered in this study.

Scenario 1 CPTPP

Scenario 2 RCEP

Scenario 3 Open CPTPP

Scenario 4 Open RCEP

Scenario 5 CPTPP + RCEP

Scenario 6 Open CPTPP + Open RCEP

Scenario 7 FTAAP+

Scenario 8 Open FTAAP+

Memo (a) TPP12

Memo (b) Multilateral tariff elimination

Scenarios 1-4 focus on individual mega-agreements, evaluating separately their likely

economic implications for 16 countries in the sample. The first two scenarios simulate the

economic impacts of the CPTPP and RCEP as conventional, “closed” (read: discriminatory)

trade groupings. The latter two are designed to throw light on the possibility of implementing

the two accords on a non-discriminatory basis in keeping with APEC’s principle of “open

regionalism” which generally connotes a commitment of voluntarily lowering trade barriers vis-

a-vis non-member countries while pursuing reciprocal liberalisation within a regional trade

bloc.

Scenarios 5 and 6 correspond to situations where both mega-FTAs are in force.

Insofar as the modelling results are the net economic outcome of two mega-FTAs’ respective

impacts, single-track economies would be better able to ascertain their real economic growth

14

potential knowing that while they are included in one mega-bloc, they are also excluded from

the other. Dual-track economies, on the other hand, can infer from the results whether their

concurrent pursuits of two mega-FTAs worth the efforts. In the simulations, we assume that

countries taking part in two mega-agreements will adopt shocks associated with the more

liberalising agreement (see sub-section II.C).35 It is certainly not the case that the relatively

deeper agreement will nullify the shallower one de jure. But, voting with their feet, businesses

facing two agreements with differentiated liberalising scopes and tariff savings may

presumably choose to make use of the more beneficial agreement of the two as a matter of

economic logic, possibly driving the gradual, de facto oblivion of the less liberalising

agreement.

Scenarios 7 and 8 look at a hypothetical umbrella FTA that encompasses 21 APEC

members in addition to four non-member countries negotiating RCEP. Since this FTA is

broader in membership in including countries like India and Cambodia that are not official

members of APEC, we label it “Free Trade Area of the Asia Pacific-Plus (FTAAP+)”36 in this

study. Incorporation of RCEP countries that do not form part of APEC in the potential region-

wide trade architecture is possible since RCEP is officially recognised as a pathway to

achieving FTAAP.37 In these two aspirational scenarios, we assume the participation of the

US, full removal of tariffs and 1 per cent efficiency enhancement. Additionally, Memo item (a)

is included to present simulation results of the original TPP12.38 Memo item (b) deals with

global tariff liberalisation as a reference.39 Table 2 summarises the assumptions under the

different policy scenarios discussed in this and the previous section.

35 In practice, it means countries that take part in both the TPP and RCEP will adopt shock assumptions

associated with the TPP. 36 This is equivalent to what is called “FTAAP-25” in Petri, Peter A., and Ali Abdul-Raheem. 2014. "Can

RCEP and the TPP be Pathways to FTAAP?" In State of the Region. Singapore: Pacific Economic

Cooperation Council. 37 Petri, Peter A., and Ali Abdul-Raheem. 2014. "Can RCEP and the TPP be Pathways to FTAAP?" In

State of the Region. Singapore: Pacific Economic Cooperation Council. 38 In the TPP12, the US is assumed to eliminate all tariffs and liberalise services according to estimate

by USITC (n34). 39 Since multilateral trade liberalisation and open regionalism do not require rules of origin to enforce

preferentialism, 25 per cent ROO-related discount does not apply in Scenarios 4, 6, 8 and 9.

15

TABLE 2 SUMMARY OF SIMULATION ASSUMPTIONS

Tariff reduction Service liberalisation Trade Facilitation Effect of Rules of Origin

Non-preferential tariff reduction and trade facilitation

CPTPP

Full removal with “carve-outs” in Canada, Mexico, Vietnam, Japan

USITC (n22) inclusive more liberalisation in communication, trade and other business service industries

1% decrease in import cost

25% reduction in projected gains

No

RCEP

100% in Australia, Brunei, Singapore, New Zealand 95% in China, Japan, Korea, Malaysia, Philippines 90% in the rest (with carve-outs)

Minimal liberalisation in communication, transport and other industries based on existing ASEAN+ agreement

0.5% decrease in import cost

Open CPTPP Same as CPTPP No Yes

Open RCEP Same as RCEP

CPTPP+RCEP

Same as CPTPP and RCEP; Dual track economies adopt CPTPP assumptions

Same as CPTPP and RCEP; Dual track economies adopt more liberal assumptions

1% for CPTPP and dual track members and 0.5% for RCEP members

25% reduction in projected gains

No

Open CPTPP + Open RCEP

Same as CPTPP+RCEP No Yes

FTAAP+ Full removal No 1% decrease in import cost No No

Open FTAAP+ Same as FTAAP+ Yes

TPP12 Same as CPTPP

Multilateral liberalisation

Full removal No 1% decrease in import cost No -

Source: Authors’ assumptions.

16

IV. Policy SIMULATION RESULTS AND IMPLICATIONS

All simulations are done using the multi-step, non-linear Gragg’s method, with extrapolation.40

Automatic accuracy function of the GTAP model is activated, ensuring at least 99 per cent

accuracy of the results to at least four decimal points (although results reported in this paper

generally keep only two decimal places for simplicity). Tables 2 and 3 present the simulated

real GDP impacts (percentage change)41 and rank orderings from highest (10) to lowest (1)

for dual-track and single-track countries, respectively, under each of the ten scenarios. Cross-

checking the findings with those of some widely cited recent works,42 it is found that figures

presented in this paper are generally in the middle range of the available studies. The rank

orderings lead to a number of findings.

The first is that while multilateral tariff elimination is the most desirable option,

countries are also better off with some regional trading arrangements than without it. This

holds true particularly with respect to developing ASEAN countries such as Cambodia and

Vietnam – whose real GDP would increase by 8.22 per cent and 3.34 per cent under RCEP

respectively. While it is true that countries would realise the highest gains if a multilateral tariff

elimination agreement could be concluded, all the modelled regional trade deals also pass the

test (from the perspective of participating economies), if the perpetuation of sub-optimal, zero

liberalisation status quo – and not dogmatic views on free trade and multilateralism – is the

benchmark. Thus, these empirical

40 Harrison, Jill, Mark Horridge, Michael Jerie, and Ken Pearson. 2014. "GEMPACK Manual." accessed

25 July 2017. http://ledsgp.org/wp-content/uploads/2015/09/gempack-manual.pdf. 41 Alternatively, welfare figures in dollar terms could be reported. But it should be noted that the

(absolute value of) welfare gains is a function of the size of the economy, meaning larger (smaller) economies will see larger (smaller) welfare gains. Presenting welfare figures alone could be misleading. If we covert absolute welfare value into percentage share, the welfare figures are not too different from real GDP figures.

42 For example, TPP/CPTPP results are juxtaposed with USITC (n22), Petri, Peter A., and Michael G. Plummer. 2016. The Economic Effects of the Trans-Pacific Partnership: New Estimates. In PIIE Working Paper Series. Washington, DC: Peterson Institute for International Economics; and Ciuriak, Dan, Ali Dadkhah, and Jingliang Xiao. 2017. The Art of the Trade Deal: Quantifying the TPP Without the United States. Calgary: Canada West Foundation. Simulated RCEP impacts are compared with Cheong and Tongzon (n8), Itakura, Ken. 2015. "Assessing the Economic Effects of the Regional Comprehensive Economic Partnership on ASEAN Member States." In East Asian Integration edited by Lili Yan Ing, 1-24. Jakarta: Economic Research Institute for ASEAN and East Asia; and Jungbluth, Cora, Rahel Aichele, and Gabriel Felbermayr. 2016. Asia’s Rise in the New World Trade Order: The Effects of Mega-Regional Trade Agreements on Asian Countries. Gütersloh: Bertelsmann Stiftung.

17

TABLE 2: “PREFERENCE ORDERINGS” FOR DUAL TRACK COUNTRIES

(per cent real GDP change in parenthesis with two best scenarios in bold)

Scenario Australia Brunei Japan Malaysia New Zealand Singapore Vietnam

1 CPTPP

1 (0.36)

1 (1.48)

1 (0.21)

1 (1.97)

3 (1.00)

1 (0.99)

1 (1.51)

2 RCEP

3 (0.61)

3 (1.87)

3 (0.55)

3 (2.59)

1 (0.69)

3 (1.63)

2 (3.34)

3 Open CPTPP

7 (1.08)

9 (3.70)

6 (0.94)

8 (6.43)

9 (2.00)

6 (2.61)

6 (6.66)

4 Open RCEP

6 (1.00)

6 (3.26)

5 (0.86)

5 (5.25)

2 (0.81)

5 (2.24)

5 (6.48)

5 CPTPP+RCEP

4 (0.66)

4 (2.08)

4 (0.66)

4 (3.15)

5 (1.22)

4 (2.07)

4 (4.17)

6 Open CPTPP+RCEP

10 (1.23)

10 (3.94)

10 (1.29)

9 (6.52)

8 (1.93)

9 (3.50)

7 (8.30)

7 FTAAP+

5 (0.98)

5 (3.19)

8 (1.07)

6 (5.35)

7 (1.57)

7 (3.33)

8 (9.43)

8 Open FTAAP+

8 (1.13)

8 (3.51)

7 (1.05)

7 (6.35)

7 (1.57)

8 (3.37)

9 (9.97)

Memo (a) TPP12

2 (0.40)

2 (1.78)

2 (0.40)

2 (2.54)

4 (1.14)

2 (1.30)

3 (4.00)

Memo (b) Multilateral tariff reduction

9 (1.15)

7 (3.31)

9 (1.19)

10 (6.60)

10 (3.25)

10 (4.04)

10 (10.75)

Source: Authors’ simulations

18

TABLE 3: “PREFERENCE ORDERINGS” FOR SINGLE TRACK (RCEP) COUNTRIES

(per cent real GDP change in parenthesis with two best scenarios in bold)

Scenario Cambodia China India Indonesia Laos Myanmar Philippines South Korea Thailand

1 CPTPP

2 (-0.07)

2 (-0.03)

2 (-0.02)

2 (-0.06)

1 (-0.01)

3 (0.00)

2 (-0.08)

2 (-0.06)

2 (-0.36)

2 RCEP

5 (8.22)

5 (0.40)

5 (0.68)

5 (0.62)

4 (2.38)

5 (0.38)

5 (1.00)

5 (2.33)

5 (4.53)

3 Open CPTPP

3 (4.45)

3 (0.30)

3 (0.09)

3 (0.16)

1 (-0.49)

1 (-0.09)

3 (0.17)

3 (0.54)

3 (0.14)

4 Open RCEP

7 (16.05)

6 (1.29)

7 (2.45)

6 (1.17)

7 (4.15)

6 (0.66)

6 (2.12)

6 (6.04)

6 (8.20)

5 CPTPP+RCEP

4 (8.11)

5 (0.40)

4 (0.67)

4 (0.61)

5 (2.41)

5 (0.38)

4 (0.97)

4 (2.32)

4 (4.46)

6 Open

CPTPP+RCEP

6 (15.79)

7 (1.33)

8 (2.49)

7 (1.23)

6 (4.09)

7 (0.67)

7 (2.22)

8 (6.21)

7 (8.56)

7 FTAAP+

9 (21.28)

8 (1.35)

6 (1.42)

8 (1.49)

8 (4.22)

10 (0.93)

8 (2.77)

7 (6.15)

8 (8.85)

8 Open FTAAP+

10 (21.90)

9 (1.83)

9 (2.89)

9 (1.62)

10 (4.63)

8 (0.87)

10 (3.04)

9 (6.91)

9 (9.96)

Memo (a) TPP12

1 (-0.58)

1 (-0.06)

1 (-0.05)

1 (-0.08)

2 (0.02)

3 (0.00)

1 (-0.15)

1 (-0.12)

1 (-0.47)

Memo (b) Multilateral tariff

reduction

8 (19.86)

10 (2.41)

10 (3.47)

10 (1.80)

9 (4.24)

10 (0.93)

9 (2.88)

10 (7.84)

10 (11.38)

Source: Authors’ simulations

19

findings are broadly supportive of Larry Summers’ famous, and much criticised, assertion that

“economists should maintain a strong, but rebuttable, presumption in favour of all lateral

reductions in trade barriers, whether they be multi, uni, bi, tri, plurilateral. Global liberalisation

may be best, but regional liberalisation is very likely to be good.”43 Economic success in

increasingly competitive commercial environment requires countries to proactively reduce

border barriers, abolish undue and superfluous regulations that may or may not have explicit

protectionist intent, win over highly mobile international capital that flows to freer and more

secure markets, and defensively neutralise third-party beggar-thy-neighbour trade policies

and practices. But the interlocking nature of modern economic relations,44 and domestic

political economy hostile to unilateral trade disarmament often render that national interests

are most effectively served through coordinated and reciprocal regional efforts where

countries swap preferential market access and trade away each other’s political opposition.

As such, the formation of FTAs at the bilateral and regional levels has increased exponentially

in the past fifty years.

Second, in all countries except New Zealand, RCEP has higher economic benefits

than the CPTPP. This is because (i) RCEP has more members than the CPTTP, (16 in the

former including such countries as China, India and Korea comparing to the latter’s smaller

11-country configuration) and (ii) trade liberalisation can be more significant in RCEP than in

the case of the CPTPP because RCEP countries typically have higher tariff barriers prior to

liberalisation. A caveat is that our model has little to say about the potential economic footprint

of an enlarged CPTPP, to which accession is, in theory, open to all APEC members and other

countries willing to adhere to its high-quality rules. Inducting a new member could provide

additional benefits not only to the accession economy but also to other economies of the

trading bloc. If countries lining up for TPP membership like Colombia, Thailand, South Korea,

43Summers, Lawrence. 1991. "Regionalism and the world trading system." Economic Policy

Symposium, Jackson Hole. 44 Baldwin, Richard. 2016. The Great Convergence: Information Technology and the New Globalization.

Cambridge, MA: Harvard University Press.

20

and even post-Brexit United Kingdom, could become part of the reworked CPTPP,45 there is

chance that the trans-Pacific bloc could be more economically enticing than RCEP.

Third, for dual track economies, CPTPP and RCEP together are better than

individually. An open RCEP together with CPTPP is even better. In other words, there is no

“Spaghetti/Noodle bowl” effect. Furthermore, countries party to both initiatives tend to capture

larger benefits, an observation that is broadly consistent with the finding of an earlier survey

conducted by the authors46 showing that 77 per cent of Asian respondents felt that countries

should pursue multiple mega-FTAs if possible. As an illustration, Singapore’s concurrent

participation in the TPP11 and RCEP leads to a real GDP increase of 2.07 per cent, whereas

the CPTPP increases GDP by only slightly less than 1% and RCEP by 1.63 per cent. This is

also true for Australia, Brunei, Japan, Malaysia, New Zealand and Vietnam, each registering a

greater preference score for the CPTPP+RCEP parallel scenario. Although one could argue

that there is a certain degree of overlapping since the additive gains are smaller than the sum

of separate gains from CTPP and RCEP tracks, dual-track economies enjoy the distinct

advantage of securing privileged free trade relations with such key American markets as

Canada and Mexico through the TPP and with Asian heavyweights like China and India under

RCEP simultaneously.

That said, to the extent that negotiating mega-scale FTAs embedding forward-looking

and WTO-plus provisions is a demanding undertaking that necessitate massive political,

diplomatic and administrative capital commitment, potential entrants should pragmatically put

the RCEP framework before the TPP – not only because the former is likely to be more

economically rewarding, all else being equal, but also because the TPP’s high standard in

services and regulations could be intimidating – and pursue multiple-mega-FTAs only when

capacity permits. Tables 2 and 3 also stand to reason that the prize of FTAAP+ is the largest

45 Petri et al (n10) show that adding Indonesia, Korea, the Philippines, Taiwan and Thailand to the TPP

agreement would boost economic benefits three times. 46 Ji, Xianbai, Pradumna Rana, Wai-Mun Chia, and Changtai Li. 2016. Economic and Strategic

Dimensions of Mega-FTAs: A Perception Survey of Asian Opinion Leaders. In RSIS Working Paper. Singapore: S. Rajaratnam School of International Studies.

21

among alternative regional accords examined in this paper. Notably, an FTAAP+ represents

the best state of trade affairs and the second best one for Myanmar and Cambodia,

respectively, generating GDP gains that are even larger than would be expected from

multilateral trade liberalisation. These projected gains associated with FTAAP+ suggest that

both the TPP and RCEP should be understood as “entrees” in anticipation of main courses to

follow.

A relevant corollary to this referencing order concerning regional accords is a

comparison of the economic impacts of the TPP12 and CPTPP (i.e. TPP11). The fourth

finding of our paper therefore is that as expected remaining signatories are made worse off by

replacing the original pact with the CPTPP given smaller GDP gains and thus lower

preference scores, but the proclamation of the US withdrawal posing a substantial and

existential threat to the deal (at least from an economic perspective) is greatly overstated.

This view supports Petri et al.47 and Ciuriak, Dadkhah, and Xiao.48 Except Japan, Malaysia

and Vietnam, all the other Asia Pacific countries in the sample manage to preserve over 80

per cent of their TPP12 gains through forging on with the TPP minus US. Even Japan,

Malaysia and Vietnam, which saw establishing freer trade with the US as a key rationale

underpinning interest in the TPP in the first place, would do reasonably well under the

CPTPP. In this regard, an important contextual factor to consider in rationalising this

seemingly counter-intuitive finding is that the US is already an open economy with markedly

low applied MFN tariff, which amounts to 2.8 per cent on average in 2015. Further opening up

of the US merchandise trade regime under the TPP would not boost trade materially. (The

forgone opportunity and benefits of securing privileged access to the US’s vast services

market explain much of the benefit shortfalls.) More profoundly, at stake politically is for the

11 countries to form a united front to challenge the Trump administration’s protectionist trade

agenda and “America First” rhetoric in the interest of buttressing the wobble global liberal

economic order.

47 Petri et al. (n10). 48 Ciuriak, Dan, Ali Dadkhah, and Jingliang Xiao. 2017. The Art of the Trade Deal: Quantifying the TPP

Without the United States. Calgary: Canada West Foundation.

22

The fifth finding of our preference ordering is that open regionalism is more attractive

than “closed” regionalism in terms of economic benefits. For FTA participating economies,

converting an preferential agreement to a more open and liberal configuration would reinforce

market forces, reduce trade flow distortions, import least cost supplies from all trading

nations, facilitate value adding and production sharing chains extending beyond the

jurisdiction of the trading bloc, and eliminate costs associated with the maze of rules of origin

and other regulations to enforce preferences.49 The theoretical proposition is supported by

policy modelling in this paper. Open CPTPP scenario is consistently ranked higher than the

CPTPP scenario for Asian countries. For instance, implementing the agreement on a non-

discriminatory basis will boost Japanese real GDP gains four-fold. Similar pictures are

projected for the RCEP grouping, the FTAAP+ bloc and parallel scenarios. While Australia,

Brunei, Canada, Japan, Mexico and Peru rank parallel, open implementation of the CPTPP

and RCEP (i.e. Scenario 6) as the best outcome, open FTAAP+ is most preferred by three

ASEAN countries, namely, Cambodia, Laos and the Philippines. Moreover, excluded party

whose exports are conventionally discriminated against in integrating markets will find open

regionals less trade diverting and more attractive to them. China, for example, would

experience net gains from a 0.03 per cent loss (under a closed CPTPP) to a 0.3 per cent gain

(under an open CPTPP) when Chinese exports are treated no less favourably in CPTPP

countries than those originating within the geographical boundary of the CPTPP bloc.

Compared to open regionalism, however, global liberalisation can deliver more substantial

gains for most of Asian countries – even though only tariff elimination is considered in this

paper. The modelling projects that the most prominent beneficiaries, in percentage terms, are

trade exposed countries with higher levels of prevailing MFN tariff rates such as Cambodia

(with a simple average applied MFN tariff rate of 11.4 per cent in 2014), Thailand (with an

MFN rate of 11 per cent), Vietnam (9.5 per cent) and South Korea (13.9 per cent). By way of

comparison, countries with relatively low trade-to-GDP ratios and low MFN border protections

49 Gretton (n34).

23

(e.g. the US, Peru and Canada) are projected to benefit modestly from global merchandise

trade liberalisation.

Also, should the hypothetical multilateral liberalisation accord go beyond mere tariff

removal in progressively liberalising services trade and public procurement markets, there

would be substantially larger benefits. Unlike merchandise trade liberalisation that had been

pursued lastingly since the inauguration of GATT in 1948, comparable movement of

multilateral liberalisation of services trade did not gain traction until the negotiation of the

General Agreement on Trade in Services (GATS) which entered into force almost fifty years

later in 1995. Due to conflicting national interests in key areas such as banking, insurance,

professional services, telecoms and transport that prove hard to reconcile at the multilateral

level, GTAS commitments by and large are more aspirational than operational.50 Leveraging

the value-added of mega-FTAs over existing GATS commitments, schedules and scopes in

liberalising selected segment of trade in services of common interest could be the first step

towards engineering a genuinely full-fledged free services trade regime that ensure

unhindered access to a competitive and efficient global services markets for all.

Going forward, the Asia Pacific policy makers should adopt a “multi-track, multi-stage”

approach in designing their regional trade policies. The first stage should centre on

concluding and subsequently implementing the mega-FTAs under negotiations, that is the

CPTPP and RCEP. As the TPP morphs into the CPTPP, further negotiations will be held by

11 remaining countries to iron out outstanding issues in relation to labour and cultural

protections and agree on new rules and procedures governing orderly withdrawal,

enlargement and review. It is imperative for CPTPP partners to stick with the deadline and

sign the final texts and schedules in the first quarter of 2018. With 85 per cent GDP

requirement gone, the CPTPP will take effect provisionally once six countries complete

domestic ratification processes. Meanwhile, ASEAN+6 partners should strive to bring on-

going RCEP negotiations to a substantial conclusion possibly as soon as next year, under the

50 Adlung, Rudolf, and Martin Roy. 2005. Turning Hills into Mountains? Current Commitments under the

GATS and Prospects for Change. In WTO Staff Working Paper No. ERSD-2005-01. Geneva: World Trade Organization

24

ASEAN chairmanship of Singapore, a pro-trade entrepôt economy. At this juncture,

disagreements between ASEAN+1 countries that do not have a bilateral FTA with each other

and perceived low tariff concessions offered by India seem to have exerted a drag on the

RCEP project;51 but it should be reminded that new and direct economic links instituted by

RCEP between China, Japan, India and others are in fact the real draw card for the

establishment of RCEP in the first place.

In stage 2, if and when RCEP talks are completed, RCEP partners not represented in

the CPTPP grouping should switch political attention and diplomatic capital to acquire CPTPP

membership52 as our modelling shows that dual-membership is preferred. CPTPP incumbents

absent from RCEP negotiations ought to do the same to seek accession to the RCEP bloc,

which in 2016 accounted for almost half of the world population, 32 per cent of global output,

29 per cent of global trade and a fifth of the global foreign direct investment inflows. In so

doing, TPP members will get unhampered access to a significantly larger integrated market

including China, while RCEP members – many of which are developing economies – will gain

valuable exposure to high-quality trade rules that may serve as an external validation as to

how to proceed with further economic liberalisation in non-traditional trade areas. For trade

strategist, pursing a multi-track trade policy straddling two mega-FTAs would spare regional

51 India on the other hand is pushing for what New Delhi calls “a balanced agreement” that involves a

commensurate level of services liberalisation which other RCEP partners are comparatively more relunctant to embrace. And some Indian officials find it difficult to reconcile external openning udner RCEP and Prime Minister Modi’s central industrial policy, the “Made In India” campaign. Nevertheless, most recently, ASEAN leaders took advantage of the ASEAN-India Commemorative Summit in January 2018 (which marked the 25 years of bilateral ties) to push India to conclude RCEP talks in 2018. See Kaushik, Narendra. Indian resistance could spell trouble for RCEP. Bangkok Post 2018 [cited 5 February2018]. Available from https://www.bangkokpost.com/business/news/1392206/indian-resistance-could-spell-trouble-for-rcep.

52 There were some legitimate concerns that incumbent TPP members might impose harsh accession conditionality to extract more concessions from aspiring countries seeking TPP membership. See Hamanaka, Shintaro. 2014. "TPP versus RCEP: Control of Membership and Agenda Setting." Journal of East Asian Economic Integration no. 18 (2):163-86. However, with the withdrawal of the US which can unilaterally dictate the terms of accession, the CPTPP has become a more equitable grouping wherein partners show more sensitivity to each other’s concerns and interests. This characteristic change is best evidenced in the willingness of the 11 remaining parties to suspend some 20 provisions of the original text of the TPP, at the request of such countries as Vietnam, Malaysia, Brunei and Canada. It is therefore unlikely that non-TPP RCEP countries would be deterred by the CPTPP’s entry requirements to the extent that the benefits of joining the CPTPP become expendable. See Rana, Pradumna B. and Ji, Xianbai. 2017. “TPP’s Resurrection: Will It Be Finally Ratified?” RSIS Commentary. Available from https://www.rsis.edu.sg/wp-content/uploads/2017/11/CO17219.pdf

25

countries the need for choosing side between the Japan-led CPTPP and China-backed

RCEP, thereby defusing daunting geopolitical tensions. Efforts should not stop at securing

dual mega-FTA participation; countries should move towards stitching the CPTPP and RCEP

into a more inclusive and coherent overarching FTAAP+ with streamlined rules that can

disentangle the region from multiple ruling and “noodle bowl” problems.53

Then, in stage 3, Asian countries could try to relax the inward-looking principle of

reciprocity embedded in the mega-deals in operationalising the principle of open regionalism

over time. To be sure, open regional approach to liberalising trade – akin to concerted

unilateral liberalisation actions – in the Asia Pacific will be politically difficult to achieve.54 If

anything, it will rely on far-sightedness and collaborative leadership potentially provided by the

region’s economic hegemons (necessarily including the US and India despite their current

protectionist trade policy rhetoric) together with the most liberal countries such as Singapore,

Australia and Chile, in recognition that the opener an agreement becomes, the more

economically stimulating it will be, as discussed above. Successes of regional arrangements

could re-energise global momentum at the WTO level to pave the way for bringing about

world-wide free trade55 in the final phase, which goes a long way in promoting sustainable

and equitable economic growth and combating economic nationalism.

53 Hamanaka, Shintaro. 2012. "Evolutionary paths toward a region-wide economic agreement in Asia."

Journal of Asian Economics 23 (4):383-394. 54 At a rhetorical level, the principle of “open regionalism” is explicitly or implicitly enshrined across

various Asian cooperative mechanisms including ASEAN and ASEAN-Plus (e.g. ASEAN Vision 2020 Declaration and ASEAN Economic Community Blueprint 2025) and inter-continental forums like Asia-Europe Meeting (ASEM). The principle is invoked predominantly for the purpose of projecting an image of the concerned grouping being non-exclusive and not targeting any third party. In the specific realm of trade liberalisation, putting “open regionalism” into practice means voluntarily lowering trade barriers to non-members (and ideally to the rest of the world) without reciprocal liberalisation. It has not been a very popular policy option except for a few ultra-liberal economies like Australia.

55 Urata, Shujiro. 2016. "Mega-FTAs and the WTO: Competing or Complementary?" International Economic Journal 30 (2):231-242; and Baldwin, Richard, and Patrick Low, eds. 2008. Multilateralizing Regionalism: Challenges for the Global Trading System. Cambridge: Cambridge University Press.

26

V. CONCLUSION

This paper uses CGE analysis to illustrate the relative economic merits of several existing and

potential trade agreements and implementation modalities. The results show that regional

trade agreement could generate economic gains to members, and should be preferred by

Asian countries to the sub-optimal status quo where multilateral trade liberalisation is on the

brink of falling to a state of permanent stasis and domestic political economy prevents

governments from pursuing unilateral measures.

Between the two mega-FTAs that currently define the landscape of trade governance

in the Asia Pacific, relevant parties should prioritise RCEP over the CPTPP not least for the

reason that the former, as the only multi-party trade grouping that brings together Asia’s three

largest economies (i.e. China, Japan and India), would unleash more substantial gains. Our

GTAP simulations also suggest that Asian countries should explore the possibility of pursuing

both the CPTPP and RCEP to maximise trade creating potentials and to strike a geopolitical

balance between their ties with China and those with Japan. Recognising that such multi-

track FTA strategy could be too resource intensive to be followed by the region’s low-income

economies, prudent policy sequencing that presumably puts RCEP ahead of the CPTPP in

the short run would be wise. Once both the CPTPP and RCEP are implemented, a follow-up

strategy would be merging the two into an FTAAP+ that encompasses all key Asia Pacific

economies. While the gap between the CPTPP and RCEP in terms of the differing level of

ambition could prove challenging to close, dual-track economies and single-track economies

that are ready to ratchet up their existing commitments would be the driving force pushing the

convergence between the CPTPP and RCEP in positive directions. In this paper, we also

illustrate the case for greater trade openness. Transitioning from a noodle bowl of preferential

regional trade agreements to open regionals and eventually to a more open global trading

system are estimated to offer far greater benefits.

27

To sum up, when it comes to trade liberalisation, the preference ordering exercise

based on CGE modelling suggests that the first best option remains a multilateral solution and

regionalism is demonstrably the second best. Open regionalism that extends preferential

market accesses to all rest of the world would generate greater economic gains than closed

agreement. The same goes to larger regional agreement (e.g. RCEP) vis-à-vis smaller ones

(the CPTPP) and multiple mega-FTA membership vis-à-vis single mega-FTA membership.

The worst outcome is for countries to stay idle, not only forgoing the opportunity to liberalise

trade with external partners but also possibly crumbling in the face of protectionist pressures,

as “bicycle theory”56 teaches us.

56 Bergsten, Fred. 1996. "Globalizing Free Trade." Foreign Affairs 75 (3):105-120.

28

APPENDIX 1. REGIONAL AGGREGATION

No. Region Original GTAP regionsa

1 Australia aus

2 Brunei brn

3 Cambodia khm

4 Canada can

5 Chile chl

6 China chn

7 European Union aut, bel, cyp, cze, dnk, est, fin, fra, deu, grc, hun, irl, ita, lva, ltu, lux, mlt, nld, pol, prt, svk, svn, esp, swe, gbr, bgr, hrv, rou

8 Indonesia idn

9 India ind

10 Japan jpn

11 South Korea kor

12 Laos lao

13 Malaysia mys

14 Mexico mex

15 Myanmarb xse

16 New Zealand nzl

17 Peru per

18 Philippines phl

19 Singapore sgp

20 Thailand tha

21 United States usa

22 Viet Nam vnm

23 Rest of the world

xoc, hkg, mng, twn, xea, bgd, npl, pak, ika, xas, xna, arg, bol, bra, col, ecu, pry, ury, ven, xsm, cri, gtm, hnd, nic, pan, slv, xca, dom, jam, pri, tto, xcb, che, nor, xef, alb, blr, rus, ukr, xee, xer, kaz, kgz, xsu, arm, aze, geo, bhr, irn, isr, jor, kwt, omn, qat, sau, tur, are, xws, egy, mar, tun, xnf ,ben

a See https://www.gtap.agecon.purdue.edu/databases/regions.asp?Version=9.211 for the GTAP countries and regions. b In the current GTAP Data Base, Myanmar and Timor-Leste are bundled in ‘Rest of Southeast Asia (xse)’. This study used ‘xse’ to represent Myanmar.

29

APPENDIX 2. SECTORAL AGGREGATION

No. Code Aggregated sector

GTAP sectors Description

1 GrainsCrops Grains, Crops, Forestry

pdr, wht, gro, v_f, osd, c_b, pfb, ocr, frs

Paddy rice; wheat; cereal grains and others; vegetables, fruit, nuts; oil seeds; sugar cane, sugar beet; plant-based fibres; crops and others; forestry

2 MeakLstk Livestock, fishing

ctl, oap, rmk, wol, fsh,

Cattle, sheep, goats, horses; animal products and others; raw milk; wool, silk-worm cocoons; fishing

3 Mining Mining coa, oil, gas, omn

Coal; oil; gas; minerals and others

4 ProcFood Processed food

cmt, omt, vol, mil, pcr, sgr, ofd, b_t

Meat; meat products and others; vegetable oils and fats; dairy products; processed rice; sugar; food products and others; beverages and tobacco products

5 TextWapp Textiles and clothing

tex, wap Textiles; wearing apparel

6 LightMnfc Light manufacturing

lea, lum, ppp, omf

Leather products; wood products; paper products, publishing; manufactures and others

7 HeavyMnfc Heavy manufacturing

p_c, crp, nmm, i_s, nfm, fmp, mvh, otn, ele, ome

Petroleum, coal products; chemical, rubber, plastic products; mineral products and others; ferrous metals; metals and others; motor vehicles and parts; transport equipment; electronic equipment; machinery and equipment and others

8 Const Construction cns Construction

9 Transport Transport otp, wtp, atp

Transport and others; sea transport; air transport

10 Comm Communication cmn Communication

11 FinSvc Financial services

ofi Financial services and others

12 Trade Trade trd Trade

13 Insurance Insurance isr Insurance

14 Business Business obs Business services and others

15 Others Other services ely, gdt, wtr, ros, osg, dwe

Electricity; gas manufacture, distribution; water; recreation and others; public administration, defence, health and education; dwellings

30

APPENDIX 3. MODELLING ASSUMPTIONS ON RCEP’S ACTIONABILITY

Tariff-cuts on Merchandise Trade (%)

GrainsCrops MeatLstk Extraction ProcFood TextWapp LightMnfc HeavyMnfc

AUS -100 -100 -100 -100 -100 -100 -100

BRN -100 -100 -100 -100 -100 -100 -100

CHN -95 -95 -95 -90 -95 -95 -95

IDN -95 -95 -95 -95 -95 -95 -95

IND -90 -90 -90 -85 -90 -90 -90

JPN -90 -95 -95 -95 -95 -95 -95

KHM -85 -85 -90 -90 -85 -85 -85

KOR -85 -90 -95 -90 -95 -95 -95

LAO -90 -85 -90 -85 -90 -85 -90

MMY -90 -90 -90 -90 -90 -90 -90

MYS -90 -95 -95 -95 -95 -95 -90

NZL -100 -100 -100 -100 -100 -100 -100

PHL -95 -95 -95 -95 -95 -95 -95

SGP -100 -100 -100 -100 -100 -100 -100

THA -90 -90 -90 -85 -90 -85 -85

VNM -90 -90 -90 -85 -85 -85 -85

NTM Reduction on Services Trade (%)

Construction Communication Business Finance Insurance Trade Transport Others

AUS -5 -5 -8 -8 -5 -8 -5 -5

BRN -5 -8 -5 -5 -5 -5 -8 -5

CHN - - -3 - - - -3 -

IDN - -3 - - - -5 - -1

IND - -5 - - - - - -

JPN - -3 -5 -3 -3 - - -3

KHM - -8 - -3 - - -8 -8

KOR - -3 - - - -3 -3 -

LAO -5 - - - -3 - -3 -1

MMY -3 -3 - - - - -3 -3

MYS - -5 - -3 - - -3 -

NZL - -5 - - - - - -

PHL - - - - - - -5 -

SGP -3 -8 -8 -5 -5 -5 -5 -5

THA - -3 - - - -3 -3 -1

VNM - -3 - - -3 -3 -3 -

- denotes no liberalisation in this sector

Source: Authors’ assumptions.

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